Hard Money Loans: Investor 'Secret Weapon' in Downturns?
When banks can't provide loans, investors turn to private lenders. How confident are you that you could qualify for financing in another 2008 situation?
Here’s a fact: traditional financing will dry up in a tough economy.
When the economy enters a recession or downturn, traditional lenders tighten their lending criteria. Banks become more risk-averse, often reducing the availability of credit to preserve their capital.
For example, during the 2008 financial crisis, mortgage originations in the U.S. dropped by over 30% as banks imposed stricter lending standards. Just one year later, in 2009, originations were back to their pre-2008 levels. Then, home price appreciation exceeded income growth.
Investors that shied away from buying, or simply weren’t able to qualify for a traditional loan in 2008, missed this special opportunity to buy properties at a discount. It’s during times like these when hard money loans are your secret weapon.
How hard is it to get traditional financing during a downturn? CNN reports that one well-off homebuyer in 2008, with a high income and healthy assets, applied for a loan on a $2.2M home with a down payment of $1.2M. His application was denied. Why? Because he was a few days late on one mortgage payment a year-and-a-half ago.
How hard money remains available during downturns
Photo by Laurie Shaw
Hard money lenders offer flexibility that is unmatched by traditional lenders. Instead of focusing on the borrower’s financial profile, hard money lenders prioritize the value and potential of the property being financed. This is called asset-based lending. This allows them to continue lending even when banks are pulling back.
Capitalizing on depressed property prices
Economic downturns often lead to a decline in property values, presenting a unique opportunity for investors. During the 2008 recession, home prices in the U.S. fell between 10 and 20%, depending on the location. This allowed investors (who had access to capital!) to purchase properties at a significant discount.
2008 case studies: success stories in a real estate downturn
Imagine you have a reliable team of contractors, a couple small fix-and-flips under your belt already, and 2008 hits. Since you’re a relatively new flipper and perhaps have a few years between the flips you’ve already completed, you don’t have an excellent established credit score for your business. You’ve always used conventional loans from a bank to fund projects, but now you can’t qualify. You’ve heard of hard money loans but don’t have any working relationships with lenders because you haven’t needed it until now. But it’s too late: hard money lenders have their established investors lined up already. They have a finite amount of capital to lend during the downturn, and since you’re a newcomer, you’re not on their priority list yet. You’ve missed the opportunity of the decade.
This is why partnering with a hard money lender before an economic downturn is so important.
Capstone Capital Partners wants to meet you! Tell us a little bit about yourself and the kinds of projects you’re involved with. We’re happy to just touch base and get to know each other.
1. Central Ohio’s 54% bounce-back
During the 2008 crisis, central Ohio experienced a spike in foreclosures. As the fallout continued, average sales prices plummeted to $156K by 2011. Investors that scooped up these homes during this timeframe were then able to sell at an average of $241K in 2019 without making a single improvement to the property.
2. Bold Texas investors receive 49% returns
Page 6 of CoreLogic’s 2018 Special Report reveals something every investor should learn from: 2008’s debacle forced Texas residential real estate down 13%. In 2018, Texas rebounded 49%. Note these figures are statewide. Imagine if you were to have been bold enough, with access to financing, and bought a 4-unit multifamily property in Austin in 2008.
3. California surges 78% post-recession
In August 2007 the recession tsunami was building. 2008 crashed into California’s real estate market, and by 2011, homeowners experienced a massive 42% loss in value. California saw more foreclosures than any other state during this time. While tragic for so many, a massive opportunity arose for investors. Seven years post-recession and investors cash out on a 78% gain.
Get to know Capstone Capital Partners!
Prepare for the next market downturn. Capstone Lending specializes in providing hard money loans that can give you the edge you need to capitalize on opportunities when traditional financing isn’t an option. Even in healthy real estate cycles, our speed-to-close – just 7 days! – is enough reason to go the hard money route.
We want to know you. Let’s have a conversation about when hard money will work for you!
